Political, economic woes loom large for Latin American polymer markets in H2

After opening 2017 with renewed optimism amid signs of economic recovery and an improved political landscape, Latin American polymer market participants now find themselves stuck with some of the same issues they had hoped to shed as they enter the second half of the year.

Lackluster demand in key markets has persisted, and renewed political and currency concerns in Brazil are leading to a pessimistic outlook for the region, sources said.

“Nobody is investing; foreign companies are holding back, and there are no lines of credit for local businesses,” a Brazil-based trader said. “The public is buying less, and with every new scandal things just get worse; negativity spreads.”

South America’s overall financial health is influenced by Brazil’s economy. With the impeachment of President Dilma Rousseff coinciding with 2016’s economic rock bottom, Brazil finished that year on a high note thanks to improving consumer confidence, a strengthening real and new president Michel Temer’s aggressive austerity package.

But halfway through 2017, Temer is embroiled in a bribery scandal and fending off calls for resignation, while the real has given back all of this year’s gains as consumer confidence has plummeted and the financial sector has seen lending tighten. The real has gone from its 2017 low of 3.0604 on February 15 to 3.3092 on June 28 — a weakening of 8.1%.

Even steep decreases in polyethylene prices from the US — Brazilian importers’ preferred supplier in recent months — have failed to spark demand in South America’s largest resin market, with importers buying minimal quantities and opting for regionally produced resins, sources have said.

And although prices in the US are primed for further reductions stemming from capacity expansions set to come online in the third and fourth quarters, some Brazilian market sources think it will just be more of the same to close out the year.

“Hopefully the rest of this year is better, but nobody believes that here or in other regions [around the world],” the Brazil-based trader said.

Import prices trending down

Import polyethylene pricing along both coasts of South America fell 13.8-17.6% from March to June. Import polypropylene pricing shed 7-12% in the period, while import PVC assessments fell as much as 11-12% before rebounding in late June, according to S&P Global Platts data.

The trends were far removed from the bullish nature of the markets at the start of the year, when seasonal turnarounds in the US, a key supplier of resin to South America, lent support to higher prices in the region.

Low-density PE assessments, for example, rose 10% from late December to a 20-month high of $1,410/mt CFR Brazil on March 1 and 8. But since then the assessment has fallen 15% to close H1 at $1,200/mt CFR basis, for an average price of $1,325/mt for the full first half, according to Platts data.

The LDPE market saw a bump in regional supply as Dow Chemical’s Argentina operations restarted production at Bahia Blanca and Colombia’s Ecopetrol parlayed last year’s record production into ambitious goals for 2017.

Argentina’s only source of domestic LDPE production, Dow restarted its 90,000 mt/year line following a nearly 14-month shutdown and was producing on-spec by early March, a source close to the company said.

Ecopetrol, Colombia’s state-controlled energy company and the sole producer of LDPE in that country, expects to produce between 65,000-70,000 mt in 2017 after producing more than 61,000 mt in 2016, a company source said. Ecopetrol credits improved feedstock and ethylene production for the uptick in PE output.

Colombian buyers are the target for Ecopetrol’s increased output, a company source said earlier this year, adding that 2016 saw just 7,800 mt of its LDPE sold in foreign markets.

Regional pricing affected

In Brazil, local producer Braskem reduced prices in the domestic market accordingly, resulting in a similar movement for the delivered Sao Paulo assessment, Platts’ recently launched domestic marker.

Domestic pricing for LDPE peaked at Real 6,200/mt ($1,893.65/mt) in early March, but has since shed Real 600/mt (9.7%), bringing the 2017 average to Real 5,905/mt, according to Platts data.

Pacific Coast markets have seen similar trends, with LDPE import pricing peaking at $1,415/mt CFR West Coast South America in early March. The import assessment marker fell 13.8% to close June, assessed at $1,220/mt CFR basis.

On the PP side, homopolymer assessments along the Pacific coast averaged $1,168.85/mt CFR West Coast South America in the first half of the year, up $94.22/mt compared with the same period in 2016. Brazilian pricing averaged $1,189.62/mt CFR basis, $92.03/mt higher versus H1 2016 as antidumping measures limited the impact of cheaper US-origin product.

South America’s PVC markets saw higher pricing in H1 2017 on average. Import pricing in Brazil averaged $930.96/mt CFR through the middle of June, an increase of $146.54/mt from the same period in 2016. Pricing along the Pacific Coast averaged $920.77/mt, up $170.58/mt versus H1 2016.

Elsewhere in South America, economic and political instability also have rocked Venezuela as inflation surges and keeps international markets at bay. The IMF has said it does not see the situation improving, and projects Venezuela’s real GDP will fall by 7.4% in 2017. This compares with the IMF’s overall outlook for Latin America and the Caribbean, which calls for growth of
1.1% in 2017.

It is worth mentioning that weak demand contributed to weak pricing in the region in 2016. Import assessments in 2016 for PE, PP and PVC in Brazil and South America’s Pacific Coast posted their lowest yearly averages since Platts began tracking these markets in 2010-2011.

This year, flooding in April and May wreaked havoc on logistics and in turn dampened already weak demand in parts of Peru and Colombia, sources said. Add to that issues with credit and repayment in Peru, and some international traders spent much of the first half on the sidelines, sources said.

After a strong start to 2017, key petrochemicals markets in the Americas enter the second half of the year with subdued expectations amid sub-$50/barrel oil, renewed political instability in key economies and capacity expansions in the US Gulf Coast region that stand to impact supply/demand balances.

This report highlights the key themes that stand to shape petrochemical markets in the Americas during the second half of 2017.